- placed upon the selling price >> raise the firm's costs
Types of indirect taxes:
1. A specific tax
- specific, fixed amount of tax imposed
- shift the supply curve vertically
2. A percentage tax
- tax = percentage of selling price
- higher price (right side of the supply curve) will have a greater stretch
- ‘Slope’ is altered
Indirect tax’s effect on producers and consumers
- When an indirect tax is imposed at the new price
a. there is a surplus for market to self-adjusts the equilibrium
- The consumers see a rise in the price from the old to the new equilibrium
a. this amount times the quantity is the tax burden of the consumers
b. the rise of the prices the consumers pay are not equal to the quantity of the tax itself
- (Government’s total tax revenue) - (revenue that the consumers are responsible to pay) = the producers tax
- (Government’s total tax revenue) = (price of tax) *(quantity of the new equilibrium point)
Effect of a Subsidy on Demand and Supply
A subsidy is…
- the amount of money paid by the government to a firm, per unit of output
A government would give a subsidy…
- to lower price of essential goods, promoting more consumption
- to prevent unemployment by guaranteeing the supply of products that they consider necessity to the economy
- to enable producers to compete with overseas trade, protecting home industry
About Subsidy
- When an subsidy is imposed, the equilibrium shifts right along the demand curve
- The total amount of government subsidy = [the quantity of subsidy (represented by vertical shift)]*(quantity at the new equilibrium price)
- The quantity of the subsidy does not always equal the price change consumer’s experience
- You can’t really tell that the total expenditure of the consumer decreased, because you are buying more at a lower price just considering the subsidy
- Normally depends on the relative saving and extra expenditure
Government Evaluation
- Opportunity cost of subsidy
a. Does the subsidy do what is should, such as making firms more efficient, and allowing local firms to compete with foreign firms
b. A subsidy will almost always result in a taxation in other products, who is paying the taxes?
c. Can damage other firms by unfair subsidies on specific firms, especially to foreign firms
*Many high-income country farmers are able to sell products beneath their cost of production due to the government’s huge subsidies, which completely wipes out the ability of developing-country farmers, as they receive no subsidy when competing with them.*
Price controls
- The free market ≠ always lead to the best outcome
- The government needs to intervene in order to achieve a better outcome
a. setting maximum and minimum prices can be one solution
Maximum (low) price controls (Price Ceilings)
- Government sets a maximum price below equilibrium price
- This prevents producers from raising price above it
- Protect consumers
a. imposed on necessities due to their relatively less change of quantity demanded compared to change of price
- Especially useful when there’s a product shortage (product is necessity)
a. set maximum price to ensure those with low income can still purchase necessities
- Due to the lowered price, the quantity demand exceeds quantity supplied
a. creates a surplus
- The consumption of the product has actually fallen, as less are supplied due to the lowered price
- The excess in demand creates many troubles such as black markets or discrimination of consumers by producers.
*The government now needs to eliminate the shortage*
- The government can do two of the following
a. shift the demand curve left
i. decreasing your total consumption, which goes against the whole point of imposing maximum prices
b. shift the supply curve right
i. provide subsidies to promote more production
ii. producing the good from the government, thus increasing the total supply
iii. releasing the previously stored product
iv. government incurs a cost, especially for the case of subsidies
- A subsidy for this particular market means it has to reduce the expenditure of other areas, opportunity cost
Minimum (high) price controls (Price Floors)
- Attempt to raise incomes of producers of goods that they consider important.
- Usually helped because prone to large fluctuations and foreign competition
- Protect workers by setting a minimum wage
a. With government intervention, there is a surplus.
i. lead to suppliers trying to illegal sell products at a lower price
b. If nothing is done, consumption will actually decrease
- Government intervenes normally by buying up the surplus products at the minimum price, therefore increasing demand.
- The government is able to store the surplus, destroy or sell it abroad.
- Storing can be expensive and wasteful
- Selling abroad can harm other country’s domestic industries
The opportunity cost of buying and storing surplus will result reduction of others
- Two other ways minimum price can be maintained
- Setting quotas, and increasing demand by advertising
Effect of an Indirect Tax on Demand and Supply
Indirect Tax is…
- imposed upon expenditure
- placed upon the selling price >> raise the firm's costs
Types of indirect taxes:
1. A specific tax
- specific, fixed amount of tax imposed
- shift the supply curve vertically
2. A percentage tax
- tax = percentage of selling price
- higher price (right side of the supply curve) will have a greater stretch
- ‘Slope’ is altered
Indirect tax’s effect on producers and consumers
- When an indirect tax is imposed at the new price
a. there is a surplus for market to self-adjusts the equilibrium
- The consumers see a rise in the price from the old to the new equilibrium
a. this amount times the quantity is the tax burden of the consumers
b. the rise of the prices the consumers pay are not equal to the quantity of the tax itself
- (Government’s total tax revenue) - (revenue that the consumers are responsible to pay) = the producers tax
- (Government’s total tax revenue) = (price of tax) *(quantity of the new equilibrium point)
Effect of a Subsidy on Demand and Supply
A subsidy is…
- the amount of money paid by the government to a firm, per unit of output
A government would give a subsidy…
- to lower price of essential goods, promoting more consumption
- to prevent unemployment by guaranteeing the supply of products that they consider necessity to the economy
- to enable producers to compete with overseas trade, protecting home industry
About Subsidy
- When an subsidy is imposed, the equilibrium shifts right along the demand curve
- The total amount of government subsidy = [the quantity of subsidy (represented by vertical shift)]*(quantity at the new equilibrium price)
- The quantity of the subsidy does not always equal the price change consumer’s experience
- You can’t really tell that the total expenditure of the consumer decreased, because you are buying more at a lower price just considering the subsidy
- Normally depends on the relative saving and extra expenditure
Government Evaluation
- Opportunity cost of subsidy
a. Does the subsidy do what is should, such as making firms more efficient, and allowing local firms to compete with foreign firms
b. A subsidy will almost always result in a taxation in other products, who is paying the taxes?
c. Can damage other firms by unfair subsidies on specific firms, especially to foreign firms
*Many high-income country farmers are able to sell products beneath their cost of production due to the government’s huge subsidies, which completely wipes out the ability of developing-country farmers, as they receive no subsidy when competing with them.*
Price controls
- The free market ≠ always lead to the best outcome
- The government needs to intervene in order to achieve a better outcome
a. setting maximum and minimum prices can be one solution
Maximum (low) price controls (Price Ceilings)
- Government sets a maximum price below equilibrium price
- This prevents producers from raising price above it
- Protect consumers
a. imposed on necessities due to their relatively less change of quantity demanded compared to change of price
- Especially useful when there’s a product shortage (product is necessity)
a. set maximum price to ensure those with low income can still purchase necessities
- Due to the lowered price, the quantity demand exceeds quantity supplied
a. creates a surplus
- The consumption of the product has actually fallen, as less are supplied due to the lowered price
- The excess in demand creates many troubles such as black markets or discrimination of consumers by producers.
*The government now needs to eliminate the shortage*
- The government can do two of the following
a. shift the demand curve left
i. decreasing your total consumption, which goes against the whole point of imposing maximum prices
b. shift the supply curve right
i. provide subsidies to promote more production
ii. producing the good from the government, thus increasing the total supply
iii. releasing the previously stored product
iv. government incurs a cost, especially for the case of subsidies
- A subsidy for this particular market means it has to reduce the expenditure of other areas, opportunity cost
Minimum (high) price controls (Price Floors)
- Attempt to raise incomes of producers of goods that they consider important.
- Usually helped because prone to large fluctuations and foreign competition
- Protect workers by setting a minimum wage
a. With government intervention, there is a surplus.
i. lead to suppliers trying to illegal sell products at a lower price
b. If nothing is done, consumption will actually decrease
- Government intervenes normally by buying up the surplus products at the minimum price, therefore increasing demand.
- The government is able to store the surplus, destroy or sell it abroad.
- Storing can be expensive and wasteful
- Selling abroad can harm other country’s domestic industries
The opportunity cost of buying and storing surplus will result reduction of others
- Two other ways minimum price can be maintained
- Setting quotas, and increasing demand by advertising